'Private sector critical for Mexico's lithium ambitions'

BNamericas speaks with Valeria Vázquez, partner and head of energy and natural resources at Deloitte Latin America, about the stagnation in the Mexican mining sector, as well as the prospects for the Sonora Plan being developed by the government with the help of the US.

The consultancy considers that the current administration will need the support of the private sector to be able to exploit reserves of lithium, a key metal for electromobility and power storage, and achieve its energy transition goals and commitments.

She warns that there is a risk of lawsuits against the State if concessions granted to exploit lithium in Mexico before the reform of the mining law in 2022 are changed, as announced by President Andrés Manuel López Obrador, who this weekend plans to visit Sonora state to deliver the first concessions to a state-owned company.

BNamericas: What are the main risks affecting Mexico's mining industry?

Vázquez: The mining industry, not only in Mexico but all over the world, is considered a high-risk business because large amounts of capital are required, project development deadlines are considerable and there's always high uncertainty regarding the results and benefits. 

Likewise, this business can present high risks in terms of causing pollution of the environment in the locations where it is carried out, as well as in terms of the safety of people who work at the mining sites and generate significant climate change impacts due to carbon emissions, mainly due to their energy requirements.

However, the products generated by the mining sector are necessary for the development of most other sectors worldwide. As the population grows, demand for minerals and metals increases for the development of society. On the other hand, despite this high demand for minerals, there is increasing rejection of mining by society.

Particularly in Mexico, investment in this sector, mainly foreign investment, has fallen in recent years, with the increase in capital costs being one of the main challenges for developing new projects. Another is the expectation of a slowdown in global economic activity, which would impact the price of raw materials, including metals and minerals.

BNamericas: What was the reason for the 66.6% drop in FDI in the mining sector last year and what's the outlook for 2023?

Vázquez: Indeed, the mining sector had a significant drop of 66.6% in terms of foreign direct investment, according to preliminary data from the economy ministry as of December 2022. It's important to note that this figure includes investment in all mining sectors, including oil and gas, metallic and non-metallic mining, and mining-related services. 

We believe that the drop in FDI is due to the country's particular situation, as well as global geopolitical events. For 2023, we believe that FDI levels will be conservative, given the prospect of a slowdown in economic activity in the US and moderate growth in China.

BNamericas: Based on statistics agency Inegi's industrial activity indicator, do you think that mining has stagnated in 2022, and why is this happening?

Vázquez: According to data from Inegi, the subsector of metallic and non-metallic mineral mining actually had a drop of -0.6% in 2022, while the mining-related services subsector has seen significant growth in certain months. However, in general terms, the mining sector shows stagnation. The most likely thing is that this behavior, as we mentioned, is due, in addition to the particular conditions of the country, to the world economic situation and the geopolitical impacts of the conflict in Ukraine.

BNamericas: What opportunities are there for Mexico to take advantage of the transition to cleaner energy, which will require minerals such as copper and lithium, and what should the government do to take advantage of them?

Vázquez: The issue of reducing GHG [greenhouse gases] worldwide has become a priority, which is why several countries have focused their efforts on the mining sector. It's a fact that mining plays an important role in the energy transition, influencing everything from electric mobility to digitization. For the manufacture of wind turbines and rechargeable batteries, metals such as copper and lithium are required.

It's important to remember that Mexico is a country with renewable potential and diverse possibilities in terms of mineral resources. In this respect, the exploitation of minerals such as lithium and copper should play an important role in the energy transition of our country.

Until 2022, Mexico was ranked ninth in global copper production and fifth in terms of the largest reserves, according to the USGS. Most of this production comes from Sonora state.

In the case of lithium, our country's reserves are 1.7Mt, according to USGS. Although it has been said before that lithium reserves are even larger, we mustn't forget that most of these projects are still in the exploratory phase, which can take 10 years or more and the development of a mine is not guaranteed. That is, there's still no certainty regarding the amount of mineral that can be extracted, the complexity of each deposit and its economic feasibility. 

It should be noted that, according to data from the economy ministry as of September 2022, the only lithium project that's currently in the development stage is the joint venture between Bacanora Lithium, Cadence Minerals Plc and Ganfeng Lithium from China.

On the other hand, the administration would have to have support from the private sector to reach its globally agreed energy transition goals, considering that most of the lithium ore identified is in clay, which is complex to extract and has lower mineral concentrations. In addition to that, the issue of granting concessions and permits would also have to be considered.

BNamericas: How do you see the government's Sonora plan and its feasibility?

Vázquez: According to the information available so far, the Sonora sustainable energy plan or Sonora clean energy plan is an initiative of the Sonora government, with the support and collaboration of the federal government, announced in November last year at COP 27 in Egypt and recently released to the general public. 

Francisco Acuña Méndez, chair of the Sonora state sustainable development council [Codeso], accompanied foreign relations minister Marcelo Ebrard Casaubón, and, very importantly, John Kerry, the US special envoy for climate.

The plan is mainly leveraged on the generation of photovoltaic energy in Puerto Peñasco, with construction by CFE, of a 1GW plant, and the intention of replicating that in other parts of the state until generation of 5GW is installed. In addition to this renewable generation, projects are being considered for the exploitation of the state's lithium deposits, a natural gas liquefaction project and the modernization of ports and airports in Sonora.

The plan seeks to encourage private investment in the state, take advantage of its photovoltaic potential and its geographical position on the border with the US to turn it into a development hub for the production of semiconductors, improve supply chains and promote the transition to electromobility.

Without a doubt, it's a very ambitious project, especially since large investments will be required. In addition to capital investments, great management capacity will be needed to ensure that the development of these projects isn't carried out in isolation and always paying attention to ESG standards. It will also be necessary to have clear rules in terms of regulation and the legal framework.

BNamericas: What do you think of the Mexican government's review of the lithium concessions granted before the nationalization of the industry, and what opportunities are there for private companies?

Vázquez: Let's remember that, based on the amendments made to the mining law last year, it was established that the State is the only one with authority to explore for and exploit lithium. Although this decree defined that no more lithium concessions will be granted, it does not establish what will happen to the concessions already in force.

The review of these concessions is somewhat unusual for sure. These amendments shouldn't have an impact on previously granted concessions, at least from a legal and regulatory point of view. Let us take into account that these concessions were granted under a different scenario and conditions, in force at that time, and that if they aren't respected, the terms of the contract would be violated, which could lead to lawsuits.

The mining law establishes the duration of mining concessions, up to 50 years, a term that goes into force from the date of their registration in the public mining registry, being extended for the same term if the holders don't commit the causes for cancellation established by the law, which include: a) termination of its validity, b) withdrawal duly formulated by its owner, c) substitution due to the issuance of new titles derived from the reduction, division, identification or unification of an area covered by a mining concession, d) commission of any of the infringements stated in article 55 of this law or, e) a judicial resolution.

Taking into account the current review of the concessions by the administration, private companies that acquired concessions before these amendments must respect the terms and conditions established at the time they acquired them, to ensure they aren't cancelled.